Deutsche Bank

Legally bound

Are the legal hassles of Deutsche Bank's bosses harming its future?

NO DOUBT about it, Deutsche Bank is at last in a league that befits Germany's biggest bank. Globally, it leads the field in foreign exchange and aspects of debt and derivatives. Thanks to its ambitious investment bankers in London, it is developing a healthy obsession with being classed among the best in the world.

Why then, is Josef Ackermann, its chief executive, apparently reluctant to take it one step further and find a merger partner? Recently, he said that sheer size, in terms of market capitalisation, is not the right yardstick to measure the bank's might. He may be right. But in many respects, Deutsche Bank remains too small.

There are, for example, gaps in its coverage in America and Japan, in launching share issues and in advising companies on strategy. It does not have the capital or clients of heavyweight rivals such as Citigroup and JPMorgan Chase in America, and UBS closer to home, which could help it withstand a serious storm.

As yet, its profitability remains good; it has recently turned in some strong quarterly results (see chart). It is also, according to published value-at-risk figures, taking smaller bets on its own account than investment banks, such as Goldman Sachs or JPMorgan, so is less exposed if the markets turn against it.

The London investment bank could do with more support, however, from the other divisions of Deutsche Bank: for instance its global private-banking business, asset management, and retail banks in Germany, Italy and Spain. The one German jewel is DWS, the subsidiary that manages German mutual funds. DWS provides the investment bank with opportunities to sell it derivatives. Deutsche Bank wants to extend its investment-banking expertise to other retail products, such as mortgages, via securitisation.

In the past few months, it has committed more resources to making the domestic bank bigger. It bought Berliner Bank in June, adding 300,000 affluent customers in the German capital. In August it bought the business and branches of norisbank, with 334,000 clients, which it hopes will give two foreign interlopers, Citibank and ING Diba, a run for their money.

This renewed enthusiasm for banking on German soil may, or may not, reflect efforts by Mr Ackermann, a Swiss, to endear himself locally. On October 26th he faces a retrial of the Mannesmann case, in which he and five others are accused of awarding €57m ($53m) of unwarranted bonuses in the wake of Vodafone's hostile takeover of Mannesmann in 2000. Mr Ackermann sat on Mannesmann's supervisory board. There is no obvious successor should he be convicted and forced to resign.

This and other litigation continues to distract top management from the task of building up the bank. Rolf Breuer, the former chief executive, and the bank itself are fighting accusations that his untimely comments precipitated the bankruptcy of the Kirch media group in 2002. Leo Kirch, its former boss, continues to dog Deutsche Bank with legal claims. Via a Frankfurt court he forced it to disclose how much it pays the six non-board members of its group executive committee, where the real moneymaking power lies. Answer: around €90m last year.

Ackermann is still smilingAP

Mr Kirch's latest initiative has prompted Berlin prosecutors to examine circumstances leading to the appointment of Caio Koch-Weser, a former state secretary of finance, as an adviser to the bank with the title of vice-chairman. Various decisions to the advantage of Deutsche Bank, including a joint mandate to securitise Russian debt, were made at the finance ministry during Mr Koch-Weser's tenure.

Deutsche Bank says it is too small to play the lead role in consolidating the European banking industry. At home it fears a merger with Commerzbank, another big bank, would mean a bloodbath of lay-offs but no substantial increase in its share of a horribly fragmented market. Instead, it has chosen to grow in small steps; it recently bought MortgageIT Holdings, an American mortgage company.

Abroad, there are merger opportunities—and complications. Credit Suisse, for example, might be a candidate. The banks have similar cultures and would complement each other, albeit with some overlap, in banking and investment management. Mr Ackermann, however, was ousted as Credit Suisse's chief executive in 1996, and might not be welcomed back. Merrill Lynch is deemed too big. Citigroup was once a possibility, but proved politically unacceptable in Germany.

With their minds on other things, it is no wonder Deutsche's bosses have no taste for such big mouthfuls. On the other hand, they run the risk of failing to grow as solidly as their chosen competitors.